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Economics 2005 Chapters 16, 17

by: Tim Reynolds

Economics 2005 Chapters 16, 17 ECON 2005

Tim Reynolds
Virginia Tech

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About this Document

These notes cover the basics and majority of Chapters 16-17 that will be on Exam 3.
Principles of Economics
Steve Trost
Class Notes
Economics, firms, perfect, competition, monopoly
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This 4 page Class Notes was uploaded by Tim Reynolds on Sunday April 17, 2016. The Class Notes belongs to ECON 2005 at Virginia Polytechnic Institute and State University taught by Steve Trost in Spring 2016. Since its upload, it has received 15 views. For similar materials see Principles of Economics in Economcs at Virginia Polytechnic Institute and State University.


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Date Created: 04/17/16
Econ 2005 Chapter 16: Public Goods and Public Choice Public Goods (social or collective goods): Goods that are non-rival in consumption and/or their benefits are non-excludable (or nonexclusive). - Non-rival – One person’s enjoyment of the benefits of a public good does not interfere with another’s consumption of it. - Nonexclusive – Once a good is produced, no one can be excluded from enjoying its benefits. Private, Public goods, and in between 1. Private Goods a. Rival in consumption b. Exclusive c. Provided by private sector 2. Public Goods a. Non-rival in consumption b. Nonexclusive c. Provided by the government 3. Natural monopoly a. Non-rival, but exclusive b. With congestion these can turn into private goods c. Provided by private sector or government 4. Open-access good a. Rival, but nonexclusive b. Regulated by government Public Goods - Free-rider problem: A problem intrinsic to public goods- Because people can enjoy the benefits of public goods whether they pay for them or not. - Drop-in-the-bucket problem: A problem intrinsic to public goods where the good or service is usually so costly that its provision general does not depend on whether or not any single person pays. - Tiebout Hypothesis: An efficient mix of goods is produced when local land/housing prices and taxes come to reflect consumer preferences just as they do in the market for private goods. Public Choice in Representative Democracy - Public Choices o Government decides two major things  Level of various public gods to provide  Amount of taxes collected and how to collect them - According to “Median-voter model,” the preference of the median voter will dominate other choices. Distribution of Benefits and Costs - Legislation can be divided into 4 groups based on the distribution of costs and benefits: 1. Widespread benefits; widespread costs a. Traditional “public-goods legislation” b. Positive impact on the economy i. Total benefits>total costs 2. Concentrated benefits; widespread costs a. “Special-interest legislation” b. Harms the economy i. Total costs>total benefits c. Pork-barrel spending 3. Widespread benefits; concentrated costs a. “Populist legislation” b. Those who pay the cost fight this legislation. c. Those who benefit usually see such little potential benefit that they remain rationally ignorant. 4. Concentrated benefits; concentrated costs a. “Competing-interest legislation” b. Fierce political battles (i.e. – labor unions vs. employers) Rent Seeking 1. Firms can make more money through lobbying them through improving efficiency or the quality of their product – so no incentive for economic efficiency. 2. Lobbying shifts resources away from production (lobbying uses real resources – time and money – that could be used to make more product). 3. Lobbying can convince politicians to spend money is ways that put a substantial cost on society but produce no real benefit. *The process of “Rent Seeking” is considered very bad on the economy. Bureaucracy in Representative Democracy - Government programs are implemented by various “Bureaus” which are: o Government departments, agencies o “Owned” by taxpayers o Funded by government appropriation - Bureaucratic objectives o While these bureaus are meant to serve the public and the “greater good,” it is likely that each bureau has another objective: maximizing its budget. Econ 2005 Chapter 17 Externalities - A Cost or benefit resulting from some activity or transaction that s imposed or bestowed on parties outside the activity or transaction. o Not all externalities are negative, there can be positive externalities that are still market failures… i.e. – Flu shots, education, etc. - Marginal private cost: cost of consumption or production paid by te consumer or firm. - Marginal damage cost: the additional harm done y increasing the level of output for an externality-produced unit - Marginal social cost: the cost to society of producing an additional unit of a good or service. MSC=MPC+MDC Fixed-Production vs. Variable Technology - Fixed-production technology: the relationship between output and the generation of an externality is fixed. The only way to reduce the externality is to reduce production. - Variable technology: the amount of externality produced at a given rate of output can be reduced by changing production techniques. “Fixing” Externalities - “Internalize” the externality: move the MPC curve so that it coincides with the MSC curve - Eliminate the externality: bring MSC down to MPC *Overall, if we can force firms to pay the full cost of production, they will produce less or find ways to eliminate externalities. Solutions - Direct Regulation of Externalities o Direct regulations puts legal limits on the amount or type of externality produced. These regulations take place at the federal, state and local level. - Taxes o The government can force the firms to internalize the externality by taxing the product that is causing the externality. Ideally the tax should be set equal to the MSD. - Private Bargaining and Negotiation o *Remember that one of our conditions for a free market is that we need a system of private property rights. o Coarse Theorem: As long as property right are clearly stated an bargaining costs are minimal, private parties can arrive at the efficient solution regardless of how property is assigned. - Legal Rules and Procedures o For the Coase theorem to work, we need laws in place that define what action can be taken when your property is damaged.  Injunction: A court order forbidding the continuation of behavior that leads to damages.  Liability rules: Laws that require A to compensate B for damages imposed. - Selling or Auctioning Pollution Rights o The government can decide how much total pollution is acceptable then auction off or allocate tradable or marketable “pollution permits” that give the owner the right to pollute a certain amount. o This method is common because the firms for whom the pollution abatement would be very expensive will bid high and buy the permits while the other firms will be forced to change their technology for production.


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